SaaS Pricing Model: More Money, More Problems
Recently, we faced the challenge of forming a new pricing policy for monitoring services . As a result, we found several interesting articles offering a non-standard point of view on the question. We offer translation of one of these articles to your attention.
This is a post about SaaS pricing models ... but it begins with a story about people's behavior.
We all know that happiness cannot be bought for money - money buys freedom, thanks to which you can do things that make you happy. Money is just a method.
')
But when people and companies start making more money, they often face various problems ... their lives and businesses become more difficult, which is completely different from the original goals.
With age, we understand that “things” are not the most important in the world — and when we are asked why we work so hard or disappear at work for days, it’s not that we need a bigger TV, a cool sports car, a boat or a giant house.
Rather, it is the feelings that these things allow us to experience with family, friends, co-workers, or work colleagues. It is the people - and the feelings associated with them - that are the real reason that we work so hard.
The interesting thing is that as soon as people start getting more money, they have more and more problems; This also applies to companies.
They can be caused by standards, operational efficiency, etc. Or maybe these problems are actually opportunities that I want to use right now, but it does not work.
“More money” usually means increased income, but not necessarily “more profit”. This usually means more * complexity *, which means more overhead, employees, less efficiency, more headaches, more time away from family and, ultimately, less happiness.
Not much like our goal, is it?
Therefore, when I help companies involved in SaaS and web applications (whether they are startups or something similar), with the installation of their pricing strategy, I always check if there is a way to scale the price not based on the size of my clients - income, employees, etc. d. - and based on the complexity of their organization.
With some application developers this will not work. But in most cases, we see a direct link between the types of customers and the complexity of their organization related to the problem being solved by the application and willingness to pay.
In other words, while the organization’s income is growing, a side effect of this growth is that the complexity of the organization — human resources, operations, finance, and everything else — is also increasing.
This is an excellent example of the phrase “More money, more problems.”
And these are opportunities for you, if you can eliminate or reduce these problems so that companies can enjoy their new money!
After all, even when more income seems to your customers to manna from heaven, if it also implies more work and more stress, then this extra money may be unnecessary.
Do not you think that people are willing to pay for the fact that you help them reduce their difficulties? It seems logical that the better you help them with business difficulties, the more they will pay.
As I said, it naturally does not work with every application or in every situation, but if you haven’t thought about it before, then it’s time to do it.
Small and medium-sized companies, of course, are experiencing worse stages than large ones simply because they have never come across this before, but every company goes through it.
Remember that you work with people, regardless of the size of the company. What motivates them as people? Understand this and you will get rich .
How does all this look in your SaaS company?
Let me give an example of applying this thinking on the basis of complexity in building your SaaS value strategy - or even if you already have one.
Suppose you provide all the functions to all customers, but differentiate between pricing groups or versions using the “number of users” metric.
User-based pricing, of course, is very common - as a transfer from the corporate pricing model of software “per workplace” - and it can cost you a pretty penny.
Suppose you have two subscribers:
Everything is not so simple here, let me explain in more detail.
If you correlated the price with the complexity of the customer’s organization, you would sell a cheaper version with fewer functions and an unlimited number of users of the company that previously paid for 50 users, and a significantly more expensive (instead of the two users version) version with an unlimited number of users of the company more complex organization.
Wait ... it looks like I want to take less money from a subscriber with 50 users than from a smaller company. But it is not.
I argue that if you set the price depending on the value ideas of customers (in this case, their complexity), then in this scenario, each company will actually pay MORE - both initially and over time, raising your assessment of the customer’s life cycle ( LTV) - simply because you set the price based on something important for the company, and not on an inexpensive metric like “number of users”.
It is difficult to talk about it in general terms, so I will tell you the real story. Sit back.
Here is an example of a company that did not start with pricing based on the number of users ... and still faced the same dilemma; This is a SaaS provider.
Their pricing was based on the number of packages the customer received each month, but all customers had access to all functions.
At first glance, the “number of parcels” seems like a pretty safe metric.
Seems like a suitable metric for setting prices.
It seems that for an e-commerce company that ships its products to customers directly from the warehouse, the number of shipments is a key metric.
But think about these two types of clients:
If you look at our problem from this point of view, then the metric that seemed appropriate to us ... this is not.
The second company - although its size is much smaller - has great needs. They need to organize a store, buy insurance, deal with customs, etc. While the first company just needs to deliver products, probably with the help of one intermediary.
What if this SaaS vendor offered pricing that included “unlimited packages”, but instead would be tied to the complexity of the organization?
The first company in the example above might have paid the same, but the second one would pay more for access to the functionality that it needs.
As you set prices with an understanding of how they work, a more complex company will be ready to pay for additional functionality.
Several other examples of matching prices (and offers) with complexity:
SaaS accounting providers - like Xero - who segment pricing based on payroll, taxes, multi-currency accounts; all that is required for more complex companies. By the way, I don’t quite approve of Xero pricing, since they use inexpensive metrics on their page, but this is just an example.
Email marketing vendors - like GetResponse - that provide budget options at retail prices for ordinary marketers, but also have high-end services like dedicated IP addresses, DKIM / SPF authentication, advanced API integration, etc. in its package GetResponse 360 .
But ... suddenly no one would do that? How would you react to segmentation in pricing based on complexity?
First you need to remember this:
People don't buy from you because they understand what you do ... They do it because you understand what they do.
You just have to think.
However…
When you begin to customize your pricing model to the needs of your customers — in this case, scaling the pricing levels to the growing complexity of the organization — you will follow the metrics that companies and decision makers within them consider most valuable.
The higher the perception of value , the higher the willingness to pay.
They have “more money, more problems” ... and now you will get more money, since you helped them solve their problems, clearly understanding their perception of value.
Oh yeah, since you made changes to your pricing and streamlined the sales process, you received this extra money without additional effort, time and effort , which makes you one step closer to freedom and a better life!
This is a post about SaaS pricing models ... but it begins with a story about people's behavior.
We all know that happiness cannot be bought for money - money buys freedom, thanks to which you can do things that make you happy. Money is just a method.
')
But when people and companies start making more money, they often face various problems ... their lives and businesses become more difficult, which is completely different from the original goals.
With age, we understand that “things” are not the most important in the world — and when we are asked why we work so hard or disappear at work for days, it’s not that we need a bigger TV, a cool sports car, a boat or a giant house.
Rather, it is the feelings that these things allow us to experience with family, friends, co-workers, or work colleagues. It is the people - and the feelings associated with them - that are the real reason that we work so hard.
Difficulty creates obstacles
The interesting thing is that as soon as people start getting more money, they have more and more problems; This also applies to companies.
They can be caused by standards, operational efficiency, etc. Or maybe these problems are actually opportunities that I want to use right now, but it does not work.
“More money” usually means increased income, but not necessarily “more profit”. This usually means more * complexity *, which means more overhead, employees, less efficiency, more headaches, more time away from family and, ultimately, less happiness.
Not much like our goal, is it?
Value setting at pricing
Therefore, when I help companies involved in SaaS and web applications (whether they are startups or something similar), with the installation of their pricing strategy, I always check if there is a way to scale the price not based on the size of my clients - income, employees, etc. d. - and based on the complexity of their organization.
With some application developers this will not work. But in most cases, we see a direct link between the types of customers and the complexity of their organization related to the problem being solved by the application and willingness to pay.
In other words, while the organization’s income is growing, a side effect of this growth is that the complexity of the organization — human resources, operations, finance, and everything else — is also increasing.
This is an excellent example of the phrase “More money, more problems.”
Complexity creates opportunities
And these are opportunities for you, if you can eliminate or reduce these problems so that companies can enjoy their new money!
After all, even when more income seems to your customers to manna from heaven, if it also implies more work and more stress, then this extra money may be unnecessary.
Do not you think that people are willing to pay for the fact that you help them reduce their difficulties? It seems logical that the better you help them with business difficulties, the more they will pay.
As I said, it naturally does not work with every application or in every situation, but if you haven’t thought about it before, then it’s time to do it.
Small and medium-sized companies, of course, are experiencing worse stages than large ones simply because they have never come across this before, but every company goes through it.
Remember that you work with people, regardless of the size of the company. What motivates them as people? Understand this and you will get rich .
How does all this look in your SaaS company?
Thought experiment: price per workplace
Let me give an example of applying this thinking on the basis of complexity in building your SaaS value strategy - or even if you already have one.
Suppose you provide all the functions to all customers, but differentiate between pricing groups or versions using the “number of users” metric.
User-based pricing, of course, is very common - as a transfer from the corporate pricing model of software “per workplace” - and it can cost you a pretty penny.
Suppose you have two subscribers:
- A large company with a very low level of complexity and a subscription of 50 users
- Smaller - but significantly more complex - company with a subscription for 2 users
Everything is not so simple here, let me explain in more detail.
- A smaller company is more likely to use more features and capabilities within the system, because it needs access to them ... but it pays less - because of your pricing model - than a larger company that most likely uses only basic functions .
- A smaller company could increase the use of your product if it had an unlimited number of users, but since you ask for money for users and not for what is important to it, it will simply remain at the same level, possibly transferring logins between employees or otherwise deceiving the system to keep from updating. You have created an artificial barrier.
- This may seem illogical if it benefits from the system, but the fact is that you justify the price on a metric that does not matter to the company, and thus it will adjust the degree of use of your product.
- For a large company, the number of users in the system can also play a role - and some such companies will need more complex functions - but they will not add users, because it will cost more. By incorrectly building your prices, you have created an opportunity for disagreement with the price and a barrier to expansion within the organization.
- If you set prices depending on the complexity of the organization, you would eliminate barriers to use and justify prices on what is really important for companies.
- Justifying the price — in this example — on a low-cost metric, you made them perceive your super-valuable product as inexpensive. Therefore, no one wants to pay you more, since the “number of users” is not so critical for them.
If you correlated the price with the complexity of the customer’s organization, you would sell a cheaper version with fewer functions and an unlimited number of users of the company that previously paid for 50 users, and a significantly more expensive (instead of the two users version) version with an unlimited number of users of the company more complex organization.
Wait ... it looks like I want to take less money from a subscriber with 50 users than from a smaller company. But it is not.
I argue that if you set the price depending on the value ideas of customers (in this case, their complexity), then in this scenario, each company will actually pay MORE - both initially and over time, raising your assessment of the customer’s life cycle ( LTV) - simply because you set the price based on something important for the company, and not on an inexpensive metric like “number of users”.
It is difficult to talk about it in general terms, so I will tell you the real story. Sit back.
Beware of the “seems” pricing metric
Here is an example of a company that did not start with pricing based on the number of users ... and still faced the same dilemma; This is a SaaS provider.
Their pricing was based on the number of packages the customer received each month, but all customers had access to all functions.
At first glance, the “number of parcels” seems like a pretty safe metric.
Seems like a suitable metric for setting prices.
It seems that for an e-commerce company that ships its products to customers directly from the warehouse, the number of shipments is a key metric.
But think about these two types of clients:
- A company that delivers souvenirs with an average cost of $ 5, 100,000 parcels per month
- A company that supplies electronics at an average price of $ 5,000, just 300 packages a month.
If you look at our problem from this point of view, then the metric that seemed appropriate to us ... this is not.
The second company - although its size is much smaller - has great needs. They need to organize a store, buy insurance, deal with customs, etc. While the first company just needs to deliver products, probably with the help of one intermediary.
What if this SaaS vendor offered pricing that included “unlimited packages”, but instead would be tied to the complexity of the organization?
The first company in the example above might have paid the same, but the second one would pay more for access to the functionality that it needs.
As you set prices with an understanding of how they work, a more complex company will be ready to pay for additional functionality.
Several other examples of matching prices (and offers) with complexity:
SaaS accounting providers - like Xero - who segment pricing based on payroll, taxes, multi-currency accounts; all that is required for more complex companies. By the way, I don’t quite approve of Xero pricing, since they use inexpensive metrics on their page, but this is just an example.
Email marketing vendors - like GetResponse - that provide budget options at retail prices for ordinary marketers, but also have high-end services like dedicated IP addresses, DKIM / SPF authentication, advanced API integration, etc. in its package GetResponse 360 .
But ... suddenly no one would do that? How would you react to segmentation in pricing based on complexity?
First you need to remember this:
People don't buy from you because they understand what you do ... They do it because you understand what they do.
You just have to think.
However…
Disagreement with the price is disagreement with the value
When you begin to customize your pricing model to the needs of your customers — in this case, scaling the pricing levels to the growing complexity of the organization — you will follow the metrics that companies and decision makers within them consider most valuable.
The higher the perception of value , the higher the willingness to pay.
They have “more money, more problems” ... and now you will get more money, since you helped them solve their problems, clearly understanding their perception of value.
Oh yeah, since you made changes to your pricing and streamlined the sales process, you received this extra money without additional effort, time and effort , which makes you one step closer to freedom and a better life!
Source: https://habr.com/ru/post/210892/
All Articles